Underlying many financial technology companies’ capabilities are access to basic clearing accounts. If you want to lend money, you need to have somewhere to store it. If you want to process payments, you need to have a bank account through which the money can flow. In the U.K., where there are a small number of banks, relative to say, the United States, the clearing system is dominated a small number of banks who have a lock hold on the clearing system. Even new entrants such as Metro Bank have to clear through Barclays rather than having direct access to the system. This causes a variety of problems, such that Barclays will necessarily have to vet which payments are made by Metro Bank.
In the United States, innovative financial technology companies such as Stripe are able to work with banks such as Wells Fargo. According to the founder of Stripe, “Stripe does indeed work with Wells Fargo. They’re a great partner. Stripe’s innovation is in the product—we care about the speed of account setup, general ease-of-use, the simplicity of our pricing, the quality of the end-user’s experience, etc. The financial infrastructure that supports this is constantly evolving, but, on the whole, not especially radical or surprising.”
But the issue here is that Stripe actually have access to bank accounts. Peer to peer lenders are able to access a virtuous community of venture capitalists, banks and others who are supportive of the overall ecosystem. In the U.K., however, according to Financial journalist James Hurley, ‘Overzealous interpretation of anti-money-laundering rules is being blamed for the difficulties that some so-called fintech businesses are experiencing when trying to secure essential banking facilities, including accounts and card services. The Financial Conduct Authority is looking into the issue as a ‘pressing matter’.”
Part of the issue is that Banks themselves are concerned by competitive threat posed by new financial companies. According to Anthony Jenkins, CEO of Barclays, “The universal banking model is dead,’, and this is not because of issues such as capital requirements. and not only because of tougher regulation and capital requirements. He says that “the need for vast investment in technology to stay ahead of the rapid wave of digitisation sweeping the industry means the bank he took over in 2012 has to be more selective”. As in, this notion that banks such as Barclays can dominate the clearing system and provide every service is unrealistic. So, the one potential competitive response is simply to block access to the clearing system. Hence, the new Payment Services Regulator launching in April.
Part of the issue is also the genuine threat posed by financial crime and terrorism. Whilst Barclays has had problems with clients such as Dahabshil, Dahabshil has also had allegations levelled against it that it is linked to terrorist financing. Given that HSBC has withdrawn from money service business banking, why should they then seek to open up new challenges elsewhere?
In all likelihood, banks will look to work with a small number of very well capitalised and managed providers rather than a large number of smaller players.